Chrysler, Cerberus and Real Estate-Nothing Is Quite What It Seems To Be

Posted by Tom Lindmark on December 25th, 2008

This is another story I picked up in the Wall Street journal yesterday. It involves, Chrysler, Cerberus, the city of Auburn Hills, Michigan, Citibank and of course the U.S. taxpayer. In the grand scheme of things these days it is relatively puny in monetary terms but it’s nevertheless interesting to see all of the twists, turns, interlocking relationships and lack of disclosure that seem to be the order of things right now.

There has been a lot of speculation about what would happen with Chrysler’s sprawling headquarters office building in Auburn Hills, MI in the event the company was liquidated or merged with another auto company. It turns out that Chrysler doesn’t own the building. Cerberus, the private equity firm that engineered the buyout of Chrysler from Daimler, bought the building in a seperate transaction at the time it purchased Chrysler.

The headquarters, it turns out, is owned not by Chrysler but by Cerberus Capital Management LLC, Chrysler’s majority owner. As part of its 2007 takeover of the auto maker, the private-equity firm bought the 458-acre campus itself from Daimler AG, Chrysler’s former owner, public records show.

As a result, if Cerberus sells Chrysler or merges it with another car company, the auto maker’s new owner or partner would have to buy or lease the headquarters from Cerberus, or move Chrysler’s operations to a new location.

In the latter case, Cerberus could be left with a sprawling property that it may have a hard time selling or leasing.

“I can’t think of another tenant … that’s a huge amount of space,” said L. Brooks Patterson, county executive in Oakland County, where Auburn Hills is located.

Actually, that may or may not be true. The Journal, as you will see in a minute, goes on to say that nobody seems to know much of anything about the details of the Cerberus/Chrysler transaction. This probably means that no one knows the terms of the lease between Chrysler and Cerberus.

Little is known about how Cerberus structured its acquisition of Chrysler, or what its intentions are for the headquarters complex. The New York firm has declined to say how much of its money it has put into Chrysler, or even the size or name of the fund it formed for the Chrysler investment.

Cerberus’s role came into focus when Chrysler asked earlier this month for federal loans, and some congressional representatives questioned why Cerberus doesn’t inject more of its own money into the company.

I could probably write a pretty long post just using those two paragraphs. You know, how could we inject billions of dollars into Chrysler and not know, blah, blah, blah. The point here is that we don’t know jack about the whole deal and certainly don’t know anything about something as trivial as the lease terms.

Moving on, here is another part of the story that intrigued me. It seems that this building is worth a lot of money. Estimates of value are all over the board but the city of Auburn Hills seems to value it at the lower end of estimates and also seems to have a pretty bearish opinion of real estate values in its fair city.

Public documents filed in Oakland County show a Cerberus subsidiary called Auburn Hills Owner LLC bought the complex on Aug. 3, 2007, for $325 million. That same day, Cerberus completed the deal to take over 80.1% of Chrysler from Daimler.

The sales binder that Daimler showed to potential buyers of Chrysler said the headquarters had a book value of $800 million and that Daimler had received an offer of $1.2 billion for the complex in August 2006, according to people who have seen the two-inch-thick prospectus.

The city of Auburn Hills assessed the property’s value at just over $460 million last year, down from a peak of about $620 million in 2005.

So, Auburn Hills takes a 30% haircut on its assessed valuation in two years. For a city in one of the more revenue challenged areas of the country that’s a lot of income foregone.

Finally, the story ropes in another one of the usual suspects. It wouldn’t be America in 2008 if we didn’t have Citibank sitting in the middle of all of this with a big loan that could be as some risk.

On the day the Chrysler deal closed, Cerberus secured a loan of $225 million against the headquarters from Citigroup Global Markets Realty Corp., public documents show.

A person familiar with the matter said Cerberus used that money to pay part of the $325 million it owed Daimler for the building.

Chrysler now leases the building, a person familiar with the matter said. Its lease payments cover the mortgage that Auburn Hills Owner obtained from Citigroup Global Markets Realty, this person said. Public documents show the payments are made directly to Citigroup but do not reveal the amount Chrysler pays.

So, Citi is sitting on a big loan to a real estate enterprise whose source of debt service is lease payments from a company that is fighting for its survival and currently on federal life support. Citi’s loan may be at risk if things fall apart or it might not be because, there is more secrecy surrounding this deal than the Manhattan Project enjoyed.

I’m doing a lot of idle musing here, like I said, this isn’t the biggest story of the year. Still, it would be nice to know a little more about just who owns and owes what to whom and how a cash strapped city justifies lowering its revenues. That doesn’t seem to be too much to ask for in return for billions of dollars. Does it?